Free Trade and Prosperity
It was November 3, 2018, the launch of Dr. Arvind Panagariya’s book on “Free Trade and Prosperity“. Not having attended a live book launch before, i was all the more excited! Arriving a little late – navigating 30+ kms of Gurgaon-Delhi traffic – to a packed hall at the Constitution Club of India, i made my way to a seat in the last row. Though just in time for the keynote address and speeches to begin!
I do like topics of finance and trade, but as a techno-management professional, economics and policy-making has mostly intrigued me. This was the reason i attended the launch upon receiving a special invite through the CII. Primarily to understand the implications of trade tariffs and the current world order. In the backdrop of US-China trade wars (2018), free-trade and openness were all the more relevant. As of 2021, we have greater push in India on “Atma-nirbhar Bharat”, which, however, is different from autarky and promotes self-reliance along with greater participation in the global economy.
Connecting economic outcomes to policies is of utmost importance and Dr. Panagariya’s book serves as a good guideline to not only Indians, but economic policy-makers across the world. Just as the book title states, “How openness helps developing countries grow richer and combat poverty”.
Free Trade and Prosperity: An Interactive Launch Event
At any seminar or gathering, the Q&A session is something i always look forward to. The book launch event was graced especially the presence of other dignitaries like Mr. NK Singh (Chairman of the 15th Indian Finance Commission), Mr. Amitabh Kant (CEO of NITI Aayog, India) and Dr. Forbes Naushad (Director of Forbes Marshall, VP of CII and Stanford PhD-MS-BS) made it worthwhile. To listen to world-renowned experts itself is a privilege.
For those less familiar with the work of Dr. Arvind Panagariya, here are some key highlights of his background and erudition:
- Currently Jagdish Bhagwati Professor of Indian Political Economy at Columbia University, New York
- PhD in economics from Princeton University, BA from Rajasthan University
- Previously served as Chief Economist of ADB; worked with IMF, World Bank and UNCTAD
- First Vice Chairman of NITI Aayog (2015-17) in India
- Author of Why Growth Matters, and India: The Emerging Giant, listed as top pick by The Economist (2008)
His focus areas include international trade policy, economic development, and economic reforms. It is in fact a sign of Dr. Panagariya’s humility, when he tried to simplify some of the core concepts, and even said that:
“Readers who are not economists can also understand the basic ideas.”
-Dr. Arvind Panagariya on his latest book
In this article i will cover the important contents of the book, as described by the author himself. I will also discuss some of the pointed questions by the audience and answers by the panelists.
A link for purchasing the book is given here – though I was lucky to have a signed (purchased) copy from none other than the esteemed author! The price is now discounted, and is easily available on Amazon.
Free Trade and Prosperity: The Book Contents
This paragraph from Part 1 of the book elucidates the aim and the central theme:
“A large part of the book is devoted to examining the link between outward oriented policies and growth+poverty alleviation. I present voluminous evidence that whenever countries have sustained rapid growth, low or declining barriers to trade, and a high or rising share of trade in GDP have accompanied it.”
Some of the major economic concepts discussed in the book include: trade, tariffs, GDP, inequality, poverty, growth, real effective exchange-rate, import-substitution, taxation, comparative advantage, etc. For someone not familiar with the domain, it helps to read about these concepts to understand the book better. Mostly, major economic and policy-related events between 1950-2015 are addressed.
As part of the book launch event, Dr. Panagariya described the structuring of the book’s contents under 4 major themes or parts:
Part 1: Arguments for and against Free Trade
- The positive case for Trade Openness
- The mirage of Infant industry protection
- Other common arguments for protection
The chapters in Part 1 give a historical perspective of free trade and provide evidence from scholarly arguments, both in favour and against the concept of free trade.
Dr. Panagariya also emphasizes the need for looking at the context and how it differs in developing and developed countries. Infant-industry protection, sustaining double-digit growth rates and impact of trade openness on poverty has greater importance in developing countries. While developed countries are more concerned with income-distribution effects of trade.
Towards the end of Part 1, the author presents a simple, yet interesting analogy of international trade with sports:
“The common sense argument is that in the same way a country cannot produce large number of world-class cricket players without competing in (international) test cricket, without being subject to world class competition in the field, it cannot produce world class manufacturers without competing against world class entrepreneurs.”
Part 2: Evidence at aggregate level – for Trade, Growth, Poverty and Inequality
Part 2 of the book covers the following themes in greater detail:
- Trade openness, growth and poverty: exposing the critics’ specious arguments
- Trade openness and growth: the empirical evidence
- Trade openness and poverty: the empirical evidence
- Trade openness and inequality
During the book launch, Dr. Panagariya spoke about free trade, openness and how it is linked to higher per capita income. On the subject of equality and poverty, he suggested that following a pull-up approach through free trade is better, rather than hoping for a passive trickle-down effect. Though there may be various arguments against free trade, it is rather certain that protectionist policies have not shown any evidence of growth in any country. On the other hand, declining barriers to trade have almost always accompanied rapid growth, in a sustained manner.
Advocating a pragmatic approach, the author states that (very) few trade economists offer free trade as a cure-all. Fernando, Krueger and Ossa in their book (1985) identified five basic conditions for sustained export-led growth. Viz. a stable macroeconomic framework, appropriate real exchange rate, free trade regime for exporters, timely financing for exporters at domestically competitive rates, and non-discrimination against savings. Frankel and Romer found that 1% increase in trade-to-GDP ratio raises per capita income by 2% on average.
As far as growth in rural areas is concerned, what we need is better access to schooling, to avail credit through formal land titles, direct cash transfers to the poor, incentivizing entrepreneurship for greater participation in growth, and other policies to speed up poverty alleviation.
Part 3: Miracles of Yester Years
Part 3 of the book covers economic case studies on free trade from Singapore, Hong Kong, Taiwan and Korea (collectively known as Newly Industrialized Economies, or NIEs). The chapters are titled thus:
- The uncontroversial cases of Hong Kong and Singapore
- Taiwan: an early triumph of outward orientation
- South Korea: from basket case to upper middle income
Scholarly debates are also part of the discussion which show that outward-oriented policies were essential to double-digit sustained rapid growth of the NIEs. After 1970s, institutions such as the World Bank also began to aggressively promote greater openness and increased role for markets in these countries.
In Hong Kong, manufacturing wage increase was a principal source of change. All quantitative restrictions on imports and exports were abolished. Industrialization took place under a wholly free-trade regime, with trade playing a central role in it.
The crux of Singapore’s growth, even during periods of import substitution was that protection must be low and temporary. And within a reasonable time, the industry should either be able to compete without protection, or be allowed to liquidate. Tariffs too were gradually lowered and eliminated, as the economy was reoriented toward exports. Foreign firms and foreign capital played a major role in the transformation.
In the case of Taiwan, which was Japan’s first overseas colony, by 1930s it was ahead of mainland China and rest of Asia in agricultural techniques. Japan built railways, developed agriculture, ports and power plants. Post 1953, grater share of the workforce shifted towards industrial products, dominating both output and trade, and exports. Growth plummeted during oil price shock of 1973, but Taiwan recovered fast. It achieved 10-14% growth rates in next 3 years. In the later years, several reforms were undertaken. Mainly related to removal of export controls, generous foreign resource allocations, duty-free import of raw-materials, labour unions, adaptive vocational education, expanding infrastructure, controlling inflation, opening up of foreign investment, arrival of MNCs, expansion of electronic exports, and rebates on taxes. During 1960-early 1970s, exporters could obtain all their inputs at world prices and sell their products at world prices.
Export Pioneering Zones (EPZs) in Taiwan combined a free trade zone, industrial parks and all relevant government administrative offices. Cutting red-tape made it easier for foreign investors to do business. Exporters were provided credit on interest rates as low as 0.99% per month. Taiwan exported agricultural products where it had comparative advantage. It imported machinery and other manufactures where production costs were relatively high. A stable, capable and highly effective government worked with foresight to introduce and implement the necessary changes.
In the case of South Korea, the author presents a timeline of major developments on how it transformed into an upper-middle income country from a basket-case dependent on foreign aid. Korean exports grew at a high annual average rate of 87.9% during 1961-64. Labour intensive sectors had shown the best performance during the initial years. Dr. Panagariya has also compared India and the Republic of Korea in one of his previous books – India: the Emerging Giant
Part 4: Miracles of today
Fourth Part of the book describes the free trade scenario in the following countries:
- India: from near Autarky to near Free Trade
- China: from Isolation to Global dominance
- Other Success Stories in Asia, Africa and Latin America.
Among Asian success stories, Vietnam and Bangladesh also find a mention.
For Indian readers, needless to say, this section is the most crucial, as it covers all important milestones in the Indian economy post independence, till 2018. India’s economic journey is divided into 5 major phases. A dedicated section highlights the role of trade and domestic liberalization in the transformation of India.
Here I am enclosing a link to the CBIC website which has detailed existing tariffs. The salient features of India’s Foreign Trade Policy are also provided on the official website of the Directorate General of Foreign Trade. I’d be happy to add link to more such resources – please do suggest!
The Chapter on China details out the major events from the country’s political-economic history. These include the Great Leap, the Cultural Revolution, and economic revival post 1961 and 1978. Measures like trade liberalization, administrative reforms, import & export licensing, export restrictions, establishing of SEZs, tariffs, etc. are discussed. The role of leaders like Liu Shaoqi, Deng Xiaoping and Zhou Enlai are also described at length.
The excerpt given below from the book shows the changing nature of exports in China.
The last chapter talks about approaches by other countries in Asia, Africa and Latin America, which benefitted from declining barriers to trade. There are examples of Vietnam, Cambodia, Bangladesh, non-oil-exporting African countries (Botswana, Uganda, Mozambique, Tanzania), and Latin American countries like Peru, Dominican Republic and Chile.
While reading, I did feel the contents of the book have quite an ‘academic’ character. And that helped with a thorough understanding of the topics. Important conclusions and summaries are also provided, along with several tabular analyses. “Connecting Policies to Outcomes” was the section at the end of each chapter, which I found particularly interesting. The insights are meticulously organized and make for a comprehensive, compelling read.
Free Trade and Prosperity: The Book Launch Event and Panel Discussion
The book launch event took place in the Deputy Speaker Hall at the Constitution Club of India, on November 3, 2018. It is a rare opportunity to witness stalwarts from academia, industry, and the government on the same platform. In this section, i have tried to capture the essence of the panel discussion during the book launch.
As a member of the audience, invited through CII, I had the privilege of seeing the launch event and the interaction, live.
To begin with, Dr. Naushad Forbes, past Chairman of CII and Co-Chair of Forbes Marshall Pvt. Ltd., made the welcome note and introduction. The publisher’s note was presented by Dr. Sugata Ghosh, Director, Academic India, Oxford University Press.
Among the first few opening remarks made by the author, Dr. Arvind Panagariya mentioned that Readers who are not economists can also understand the basic ideas. He said that “transparent, open, and participatory” are key elements of free trade, and that WTO needs to be made more effective on this front.
Addressing the gathering through a video-recorded message, distinguished guest Mr. Suresh Prabhu (then Minister of Commerce and Industry) said, “Let the world prosper, with India starting first!”.
Presented below are the primary insights shared by the esteemed panelists.
Mr. NK Singh, Chairman of the 15th Finance Commission, was moderating the entire discussion. He emphasized the need for unilateral liberalization and reciprocity, and congruence of free trade with “Make in India” initiative. He said that State governments are also interested in free trade. We have to find ways to make them stakeholders of a more open trading order. To work out strategies that can enlarge the constituency for this sort of change.
Mr. Amitabh Kant, CEO of NITI Aayog said, “India needs to integrate itself with the global value chain for growth. To uplift people from poverty, exports are critical. India’s (global) GDP export share is only 11%. China at it’s peak of growth had 37% share of exports in GDP. Ease of doing business has improved. But takes long time to push our goods to export. Size and scale is smaller, especially in MSMEs. (we must) Adopt global standards to succeed in the global market.” He also stressed the need for all civil servants to read the book on Free Trade and Prosperity, and apply it’s learnings towards better outcomes. Mr. Kant further added, “Pharma and automotive are important sectors. Here FDI has increased. Ease of doing business has improved. Export can be done with liberalization of imports. Need basic goods and raw materials to produce goods.”
Dr. Naushad Forbes said that free trade must lead to consumer benefit. India should not increase tariffs as a result of what is happening in the US. He also made an important observation related to political economy – willingness on part of decision-making body to engage. Quoting Paul Samuleson, Dr. Forbes said that “protectionism is like skin diseases. Cure at one place, reappears at another. If demand of goods is there, why not produce them at home”. He talked about Bajaj being an excellent case study on exports. The company exports 40% of its output. And is the no. 1 provider of two-wheelers in Cambodia, Egypt and Nigeria. (Dr. AP: Initially Bajaj was not in favour of removing protectionism, but later Bajaj itself revolutionized motor bikes, and their export).
Continuing with the lively discussion, Dr. Panagariya talked about the first years of independence in India, and the existing protectionist policies. And how later PV Narasimha Rao opened the economy, both externally and internally. He stated that from 2002 to 2011 Indian exports grew from 50 billion to 300 billion
Panelists’ Views on WTO
Mr. NK Singh posed a question on the future of WTO and institutional framework that supports a more liberal trading order. Referring to the transformation of GATT to WTO, where each country has a veto, he asked “How to have a more credible framework for a multilateral order? What can be done to improve the output?”
To this Dr. Arvind replied that we often get the impression that WTO has not delivered. But the WTO came out of GATT. First globalization started in 1870 and ended with First world war. After 2nd World War, the entire world economy was hugely protected. Today globalization has happened, with huge progress. It’s the highest levels of prosperity that the global economy has seen. China has exploited WTO structure in a way that wasn’t anticipated. But now the US has taken control. With some modifications, it can alleviate pressures from China.
Further observations were made regarding how China has heavily subsidized many sectors. But putting strong tariffs on China would impact consumers themselves in the US. Protectionism may not help. On this front, India needs to have great foresight and vision, and inputs from people of intellectual integrity like Dr. Panagariya are all the more needed.
While having focused mostly on trading groups, WTO now needs to focus on services. In 1991, Mr. NK Singh and Montek Singh Ahluwalia among others provided conviction for the long run. Hence, it was felt that building a community of deep-seated conviction was quite important.
Free Trade and Prosperity: Questions to the Author
Towards the end of the discussion, the live interaction was made open to the audience. The people making their queries were allowed to briefly introduce themselves, and the audience had a good mix from various sectors.
Here I present some of the key questions asked to the author, and his answers.
- Question 1: How to compensate the “losers” of free trade? Especially in terms of Inequality
Dr. Panagariya’s Answer: In India, poverty has declined across all groups, religions and castes. Growth and openness facilitate revenues. That itself expands the public distribution system. We can use revenues to invest in education. Create jobs and raise wages. These revenues in turn help the government run social programs like MNREGA.
- Question 2: When we hear of “make in India” and the story of Bajaj, which is that one commodity that needs 100% protection?
Dr. Panagariya’s Answer: As far as free trade and protection is concerned, the consumers should firstly be made aware (of the market) and not be cheated. Prices need to be competitive. Foreign cars are sold at 1.5 times the price. (Consumers can also) lobby to get the tariff removed. However, production is not large scale. So prices run high for foreign cars.
- Question 3: How to make politicians understand free trade? Since they focus more on electorate and not on outputs
Dr. Panagariya’s Answer: The Indian electorate has not really been an opponent of free trade. We have come from 160% tariffs in 1991 to 11% tariff in 2011. Now we have many more products and options compared to 60s and 70s, so electorate is in favour of free trade. Common people are not against this. Politicians and businesses who surround them may be more in favour of protectionism. But on an optimistic note, I see overwhelming consensus in favour of a “free-er” trading order.
After the Q&A session, the book launch was wrapped up with concluding remarks from the team of Oxford India Press. The audience was also invited to get the copies of their books signed by Dr. Panagariya, i being one of the lucky ones!
Free trade is a vast and constantly evolving domain. And i could do only as much justice to the topic as the scope of covering a book launch event provides… For more information, you can listen to the author’s interviews and talks on YouTube or follow him on Twitter.
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